(Pictured: Peter Hiom)
Peter Hiom, the deputy chief executive of the ASX, has had only three jobs in his career, all exchanges, but he says it feels like he’s had 30. Stock and other exchanges around the world have arguably changed more, and more rapidly, than the corporate and financial markets they serve. He spoke with Greg Bright about recent changes and future developments at the ASX.
The term which the ASX coined a few years ago and which best describes a core aspect of its future strategy is the “investment supermarket”. While the introduction of mFund this year is the most obvious in the advised investment industry, other recent additions to the supermarket shelves are equity derivatives, the ASX collateral service and government bonds for retail investors. A lot of work is also going into assisting the development of a corporate bond market and the possible introduction of international shares.
The potential introduction of both corporate bonds and international shares is complex. ASX is continuing to navigate their path in collaboration with ASIC, which tends to “set the boundaries for the ASX”, Hiom says, given its primary concern that investors are fully informed and able to make appropriate decisions about new investment products.
“We support regulatory change to reduce the burden on companies looking to tap the debt market,” he says. “At the moment they have to provide a full prospectus, even though the top 200, which have already listed, have to comply with the full disclosure requirements. If we don’t make it easier, it won’t be done. We hope that it can be done with a ‘cleansing statement’. We have a product structure ready to go and legislation has been passed to make it easier. But there’s still a significant overhead for companies to raise debt.”
With the proposed market for international shares, Hiom is taking a personal interest. “We’re working hard to address the concerns of the regulator,” he says. “Imagine being able to invest conveniently in the top 100-or so companies in the world. That’s something investors would like. We have a lot of strong support from brokers for the proposal, because at the moment it’s three or four times more costly to trade international shares than Australian shares.”
The international companies would be available for trading on ASX through a depository receipt structure provided by a third party. The investor has an economic exposure to the stock, including dividends, without owning the shares.
“You can trade in ASX on the Frankfurt exchange and you can trade Apple through ASX warrants. Customers will find a way to invest, so it’s a question of how we can participate and best serve their needs. We want to increase efficiency, reduce costs, and do this in a way that protects investors” Hiom says.
ASX has helped establish the exchange-traded funds market in Australia, which in the past couple of years has taken on a new lease of life due to increasing demand for direct investments, especially from SMSF trustees. Earlier this month, State Street Global Investors, the first to list ETFs in Australia, introduced the SPDR S&P 500 ETF, the world’s largest ETF, which tracks the US equity market. BlackRock and Vanguard have also introduced international and local ETFs in recent years, along with some boutique players, such as Australian-owned Beta Shares.
Australia has more restrictions on its ETFs than, say, the US. Traditionally, actively-managed and leveraged ETFs are not allowed. ASX is moving steadily, too, with its roll-out of mFund, which is being monitored by ASIC. Managers are only initially allowed to transact on funds which have short-form prospectuses – which tend to be simpler products – but it is hoped this will be expanded to include those with long-form prospectuses in future.
“Sometimes it makes sense to do things in a gradual way,” Hiom says. “We’re happy with the take-up of mFund as a start. It will take time. Broadly, we’re meeting our expectations.”
He believes that mFund is a “game changer”. It makes applications and redemptions much easier, cheaper and more transparent in terms of pricing. As many commentators have pointed out, few funds from managers owned by the big banks have yet joined up. The suggestion is they are protective of their own legacy platforms and managed fund distribution networks.
“How it affects various players in the market differs,” Hiom says. “I see it as a natural progression as everyone makes their own prioritisation calls. I have seen this a lot. There are first-movers and there are some who wait and see. It’s the same with, for example, a new derivative product or a new post-trade service such as collateral management.”
The ASX collateral management service, which has been live for the past year, optimises the use of ‘non-cash’ for collateral purposes, mobilising securities within CHESS and Austraclear. ASX intends to expand this beyond fixed interest to include equities.
Hiom says the importance of this service is growing because regulation is increasing the requirements for OTC exposures, which in turn is increasing the need for collateral. There is a total of about $3 trillion of assets sitting inside CHESS and Austraclear.
An innovation in the trading business is Centre Point, ASX’s anonymous mid-point matching service. Because it’s offered by ASX it differs from other dark pools by being regulated like an exchange. It is transparent in the way matching occurs, transparent in its pricing, and is open to every investor without prioritising one over another. About 8 per cent of ASX’s total average daily equity volume is executed through Centre Point, which makes it unique among exchange offerings.
As ASX moved from its former structure of being owned by members to public ownership, and transferred part of its regulatory role to ASIC, its relationships within the finance industry also evolved. It now has a wider range of and far more customers due to the spread of new services.
However, Hiom believes its core relationship with the broking fraternity has become even closer. “They remain one of our most important customer groups and we need to maintain that closeness. With changes to Australia’s equity market structure, we’ve cut our fees and become more focused on delivering a better customer experience. This includes building a customer command centre, to strengthen the delivery of our operations and technology services, within ASX’s Australian Liquidity Centre (the ALC).”
To help get closer to its ‘end’ customers, such as super funds and other fiduciary investors, ASX has employed an experienced superannuation and markets professional, Trish Nicklin, in the past year. It has partnered with ASFA, for instance, on events and commenced a direct dialogue with funds. More recently it appointed Eloise Wett to the new position of general manager, customer experience, to oversee activity enterprise wide, and this year established customer advisory panels across key segments of its business to better understand market needs.
The $40 million ALC, which next year will house the 24-hour customer command centre, is impressive from the outset following our authorised visit. The first thing which strikes you is the venue’s security, boasting such nifty technology as iris readers to pass through internal doors. It can be completely self-contained in electricity generation, has closed-water-circuit air conditioning and telephone connectivity from two separate exchanges.
Because many customers are driven by global standards of security there are special steel cages for some batches of customers’ hardware. ASX has even had to provide against the likelihood of earthquakes, flooding and fire. Special rooms house dozens of massive gas bottles to suppress fire by argonite gas, which is mixed with enough oxygen so as not to harm people inside the building. As a last resort, water can be used.
Nicklin says the ASX is building a community of customers who are connected through the site and are able to interact with each other, as well as the exchange, more efficiently and cost effectively. There are more than 800 ‘connections’ currently in place. It is no longer just a data centre.
“We work in one of the most disruptive of industries,” Hiom says. “I think there will be an evolution in raising capital. We’re watching crowd funding closely and also the tech start-up area. While the regulators may have to catch up with what’s happening in some areas, I don’t worry about the role of public markets. They will continue to innovate.”
Hiom started his career, despite a keen interest in the theatre and a predisposition to advertising and marketing, at the London International Financial Futures Exchange (LIFFE). “I arrived not knowing anything about financial markets,” he says, “but I liked all the shouting and the [colourful]jackets.
After the London futures exchange lost its biggest trading contract to the German exchange due to its embrace of electronic trading, Hiom says he learned that exchanges had to continue to innovate to survive. He moved to Australia to join the Sydney Futures Exchange, which was grappling with similar challenges, although the first attempt at a merger with the ASX was rejected on competition grounds. The two eventually merged in 2006.
“Although there’s nothing for ASX to talk about at the moment, we think further consolidation and globalisation are inevitable. We continue to evaluate opportunities and believe it is important to build the strength of ASX’s business. This will give ASX a seat at the table and put us in the best possible position to participate in any future opportunity,” Hiom says.